FIRST CITIZENS: AN EXCELLENT GROUND FLOOR OPPORTUNITY

17 July 2013


The First Citizens Group initial public offering (IPO) is finally afoot, and could not come at a better time as local investors face a deadly trio of scarce opportunities, low yields and high liquidity. First Citizens Group (or FCG), is a highly rated financial institution that is not without its risks.

However, we highly recommend First Citizens Group, given the TT$ 22 per share price, which puts it at a discount to its own book value and to other local banks, and due to the overall financial strength of the institution and its growth prospects.

Overview

First Citizens Group is a leading financial institution based in Trinidad and Tobago, engaged in consumer banking, corporate and commercial banking, wealth and asset management, capital market transactions, trustee and brokerage services and currently has ten active subsidiaries.

Its largest subsidiary, First Citizens Bank, has an extensive retail branch network with 26 banking branches in T&T, 5 banking branches in Barbados, and 96 ATMs in its network. In 2009, FCG acquired Caribbean Money Market Brokers and rebranded it as First Citizens Investment Services (FCIS). FCIS has investment subsidiary offices in Trinidad and Tobago (3 branches), Barbados (1 branch), St Lucia (1 branch), and St Vincent and the Grenadines (1 branch).

First Citizens Group is the highest rated indigenous financial institution in the English speaking Caribbean, with a BBB+ from Standard and Poor’s, and a Baa1 from Moody’s. FCG has won 5 awards since 2009, including a citation as one of the Top 5 Safest Banks in Latin America and the Caribbean in 2012 from Global Finance magazine, Best Bank in T&T 2010 (The Banker magazine), Safest Bank in the English speaking Caribbean for three consecutive years through 2012, and Bank of the Year 2009 (The Banker magazine, Latin Finance magazine, and World Finance magazine).

First Citizens Group has been growing its footprint as of 2012, as it opened a representative office in Costa Rica, and acquired N.T. Butterfield Bank of Barbados to gain access to that market.

Financial Highlights

FCG has experienced tremendous growth in the last 5 years, especially since its acquisition of CMMB.

First Citizens makes most of its income from interest collected on loans and investments; between 2009 and 2012, interest income accounted for between 72% and 80% of income.

Net Income has increased from TT$ 1.2 billion in 2009 to over TT$1.5 billion in 2012, or around 25%. This is despite the fact that interest rates have been steadily going down since 2008; however, declining rates are reflected in the fact that interest income has been going down, while other sources of income have been increasing over time.

In 2008, deposits stood at TT$ 9.4 billion. By 2012, deposits were TT$ 18.9 billion, having grown by more than 100%. This large increase in deposits is mirrored in the tremendous growth in loans to customers, which grew from TT$ 3.4 billion to 10.3 billion in the same period, or almost 200% growth.

These increases are due in large part to the CMMB acquisition, which expanded FCG’s balance sheet considerably and has placed it on a much larger playing field. Assets grew by 165%, from TT$ 12.8 billion to 34 billion, while liabilities (which include deposits) grew from TT$ 13.2 billion to 28.3 billion (a 115% increase).

However, the acquisition of CMMB had its costs as well. Asset quality deteriorated markedly, due to the fact that CMMB was in distress, being part of CL Financial, coupled with the impact of the global economic and financial crisis. Nonperforming Loans as a percentage of total loans increased from 0.8% at the end of 2008, to 4.56% in 2012.

Nevertheless, First Citizens has always positioned itself very defensively regarding its balance sheet. FCG has consistently boasted the highest regulatory capital to total assets in the local banking industry (close to 17% capital to assets and 58% Tier 1 capital to risk weighted assets), and also has the highest provisions against loan losses, as a percentage of nonperforming loans (60%). FCG also has TT$ 2.5 billion in cash to deal with any liquidity issues.

More than 60% of the loan book is attributed to corporations, with most of these being demand loans. In the loan portfolio, the top 3 categories being mortgages (31.5%), construction (30.7%) and consumer loans (14.2%), and representing around 76% of total loans.

Valuation

As Warren Buffett says, price is what you pay, value is what you get. From a valuation perspective, FCG stands up very well on its own and relative to its peers.

The IPO is priced at TT$ 22 a share, representing a price to book value ratio of 0.96. In other words, at TT$ 22, you are paying less than the value of the firm after all assets are disposed of and all liabilities are paid off. While this discount is slight, at 4%, it is still very attractive. First Citizens is also attractive from an earnings point of view, trading at 12.4 times its 2012 profit after tax and at 9.4 times its expected earnings for the 2013 fiscal year.

Compared to the two other listed Trinbagonian banks, FCG is priced very attractively. Republic Bank trades at twice its book value and 14 times earnings, while Scotia trades at almost four times its book value and 22 times earnings. You are also paying more price-wise, as Republic has been trading between TT$ 105 and 110 per share for most of the year, while Scotia has been in the TT$ 60-70 per share range.

Lastly, from a dividends perspective, FCG also takes first place. Republic sported a dividend yield of 3.66% in 2012, while Scotia had a dividend yield of 2.24% during the same period. Based on projections for 2013 earnings, and assuming that 45% of profits after tax are distributed as dividends, First Citizens Group will have a dividend yield of 4.77%. The final number may vary depending on whether FCG meets its profit objectives; the dividend yield may also be higher if they distribute more than 45%, as that is the lower part of the 45% to 55% range of profit targeted for future dividends.

Risks

No investment is without risk, and First Citizens Group is no exception. 

As an institution that is majority owned by the government, there is substantial political risk. Certain loans or projects may be taken on for political purposes, or the Government may intervene detrimentally in the management of the company.

The jump in nonperforming loans between 2008 and 2012 was dramatic, and while we do not expect it to be replicated, there is a moderate probability that some restructured or renegotiated loans may become nonperforming going forward, especially if economic conditions do not improve. FCG has substantial exposure (more than 50% of lending) to mortgages and construction loans, which tie it to real estate and construction sector risks.

Additionally, since the CMMB acquisition, First Citizens Group has been very exposed to securities market risk. Most of the securities are local or regional in nature, but almost a third is internationally traded. Recent volatility in international interest rate and bond markets may negatively impact on this part of the portfolio, leading to actual or ‘paper’ losses.

Lastly, other acquisitions or expansion efforts, such as those in Barbados and Costa Rica, may fail to provide adequate returns and or incur losses to the group as a whole. Both of these initiatives had minimal impacts on the group’s financial strength but if over time they prove to be unprofitable, they can lead to underperformance.

Conclusion

First Citizens Group represents a great ground floor opportunity to invest in one of the region’s most solid financial institutions. It is priced at a discount to its own book value, and relative to the value of its peers.

Lastly, given large amounts of liquidity in the market and a lack of suitable investments, we expect demand for this offering to be exceptionally high during the issuance process, as well as in the secondary market.

We recommend First Citizens Group as a strong buy! 

Firstline Securities is an official sub-distributor in the initial public offering and can help you buy shares during the IPO process or in the secondary market. Please come in to our offices at 46 Agra St, St James, or on the 1st Floor at the Chamber of Commerce in Westmoorings. You can also reach us at 628-1175 or 633-4153 or email us at info@nullfirstlinesecurities.com.

2 Responses to “FIRST CITIZENS: AN EXCELLENT GROUND FLOOR OPPORTUNITY”

  1. Xena says:

    Hello, is there and provision for nationals currently residing abroad ?

    I have family who is very interested in subscribing for shares.

    Please let me know .

    Thanks,
    Xena

    • FSL says:

      Hi Xena,

      Firstline can certainly assist in ensuring that T&T nationals, where ever they are based, can participate in the IPO. We would provide you with all the documentation that needs to be completed via email; including the documents that you must return to us. However, you will need to have your Trinidad and Tobago passport notarized, before we accept it as proof of your status. Also, you would need to let us know if you already have a brokerage account open and you’re in possession of a TTCD (Trinidad and Tobago Central Depository) number? If not, we would also do this on your behalf.

      Hope this sounds good so far.

      Should you wish to continue with the process / transaction, please contact us at info@nullfirstlinesecurities.com and we’ll take it from there.

      Team Firstline